The US Spectrum Auction: Creating a Wireless Duopoly or Restoring Market Balance?

by Matt Klassen on February 21, 2012

For a brief moment this past summer, as the doomsday clock towards the U.S. defaulting on its debts crept ever closer to zero hour, the ongoing spectrum debate was front and centre, a source of billions in untapped revenue available as part of a multi-pronged plan to avoid financial disaster. While the looming threat of hitting the debt ceiling has passed for now, talk of a spectrum auction continues, as the government looks for ways of paying for its lofty promises and increased spending.

Now as it was then, questions are being raised about ‘fairness’ and ‘competition’ in the wireless sector, with concerns that a spectrum auction used as a quick governmental cash grab could end up forever destroying any sort of competitive balance among carriers, a situation that will ultimately end up hurting the average wireless subscriber.

As a reasoned solution you might think it prudent to exclude the dominant wireless duopoly of Verizon and AT&T—who together hold 70 percent of the current available spectrum—from the auction in order to diversify the market and introduce new competition…but since when did reason or prudence have anything to do with business or politics?  

Does fairness have anything to do with capitalism? It used to, as not even two decades ago Congress and the wireless sector faced off for the first time over spectrum, with the former opening up the auction only to those who at that time did not hold any bandwidth licenses (those who had no spectrum). In regards to increasing competition and spurring the market forward, the limited auction was a resounding success, a template that countries around the world subsequently used to create their own competitive wireless markets.

Now, however, things have changed, and (like every other debate in America) these new spectrum auctions have quickly become a distinctly partisan issue, with Republicans pushing for changes to the Telecommunications Act that would see dominant players Verizon and AT&T included in such a sale and the FCC all but neutered of any real power to prevent duopolization.

While unquestionably proof of the success of wireless lobbyists on Capitol Hill, the decision is being defended as a matter of simple economics. The goal of Congress in all this is to find additional revenue streams to help assuage America’s ongoing financial crisis, and so allowing the players with the most money into the auction will automatically mean a higher yield; a distinct benefit to the taxpayer, right? Wrong.

What Congress will likely only see after the auction has been completed and Verizon and AT&T have walked away with the lion’s share of the new spectrum, leaving the government with a woeful yield on one of its key assets, is that including Verizon and AT&T won’t drive the spectrum prices up, but instead likely drive them down, as other potential competitors won’t even bother getting involved in the auction if they know they’ll never win.

To wit, several European countries have suffered through exactly this scenario, with large market competitors taking the majority of the spectrum licenses at a low price (instead of engaging in a bidding war) and then dividing the licenses between them at bargain basement prices.

In the end, if recent history has taught us anything it’s that allowing spectrum gluts like AT&T and Verizon into the auction will only serve to maximize industry profits. Its unlikely that their inclusion will help the government reap increased financial benefits and such a continued market duopoly will only serve to hurt consumers, so as un-American as it sounds, leave the big boys on the sidelines for this one.

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Written by: Matt Klassen. www.digitcom.ca. Follow TheTelecomBlog.com by: RSS, Twitter, Facebook, or YouTube.

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